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The Skinny on Options: Abstract Applications

Positive Drift Mathematics

The Skinny on Options: Abstract Applications

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

If you’ve followed tastytrade for any length of time, you’ve certainly heard us say that stock price movements are 50/50 propositions. The probability they go higher or go lower in any given moment is a coin flip. Well, technically it’s a weighted coin flip because the probabilities are 53/47, with a slight skew to the upside, as our research has shown us.

The reason for this asymmetry is the positive drift that is baked into asset pricing models that follow Geometric Brownian Motion. This positive drift simply means that markets should move higher over time, and it is one of the two components to your return over any time interval. The simple fact that stock prices move higher in the long-run makes intuitive sense from a growth, innovation, and risk premium perspective. Today, we see that not only does this make sense intuitively but also mathematically, as well.

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